Income Smoothing and Information Uncertainty

Variability of managers’ expectations has an economic value from investors’ perspective. Therefore reducing the forecast error of the future periods in compare with the current period is one of the income smoothing incentives. This research main question is whether the income smoothing will reduce the enterprise information uncertainty? Therefore total and discretionary accruals are being used as two criteria for income smoothing. Enterprise information uncertainty is also measured by factors such as return variability, standard deviation of forecasted EPS and EPS forecasting error. The hypothesis is that there is a significant relationship between the income smoothing and information uncertainty. We used the panel data regression, fixed and random effects model and the panel least square (PLS) for testing the hypotheses. The population is all the non-financial listed firms in Tehran Stock Exchange during the years 2005 to 2009. The results show that there is a negative significant relationship between the income smoothing and information uncertainty of the enterprise in confidence level of 95%. The adjusted R-squared shows that the discretionary accruals as the factor of income smoothing in compare with the total accruals could better explain the enterprise information uncertainty.